Guide
Line of credit vs business loan: which does your business need?
These two products are not competing versions of the same thing. They solve different problems, and using one for the other's job is expensive.
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These two products are frequently presented as alternatives, as though a business simply picks whichever it prefers. They are not alternatives in any meaningful sense. They solve different problems, and the cost of using one to do the other's job is substantial and entirely avoidable.
The distinction is simple enough to state in a sentence. A term loan gives you a lump sum and a fixed repayment schedule. A line of credit gives you access to a limit you can draw against, repay, and draw against again. Everything else follows from that.
1. The actual difference
| Business term loan | Line of credit | |
|---|---|---|
| How you receive it | One lump sum at the start | A limit you draw against as needed |
| Interest charged on | The full amount, from day one | Only what you have drawn |
| Repayment | Fixed schedule, fixed end date | Revolving; repay and redraw |
| Typical cost | ~7–12% APR at bank level | ~8–25% APR on drawn funds |
| Typical maximum | Varies widely by lender | Around $250,000 |
| Time to funds | 2–4 weeks | 1–7 days to open; instant thereafter |
| Additional fees | Origination is common | Draw and maintenance fees are common |
Note the last row in particular. A line of credit frequently carries a monthly maintenance fee whether or not you use it, which is the price of keeping the facility open. A term loan concentrates its fees at origination. These structures reward opposite usage patterns.
2. How each one costs you money
A term loan charges interest on the entire principal from the day it lands, regardless of when you spend it. If you borrow $80,000 for a renovation and the contractor bills you in three stages over five months, you are paying interest on the full $80,000 throughout — including on the money still sitting in your account.
A line of credit charges only on what is drawn. The same renovation, funded from a $80,000 facility drawn in three stages, accrues interest on each stage from the day it is taken. That is a real saving, and it is why lines of credit suit staged and uncertain spending.
Worked example A business needs roughly $50,000 across a year, but never more than $20,000 at once, and each need lasts about six weeks. Taken as a term loan at 11% APR over two years, it pays interest on $50,000 for the full term — around $5,900. Taken as draws against a line of credit at 16% APR, it pays interest on about $20,000 for about eighteen weeks in total — closer to $1,100, plus maintenance fees. The line of credit carries the higher headline rate and costs roughly a fifth as much, because the rate is applied to far less money for far less time.
Reverse the pattern and the answer reverses with it. A business that draws its full limit on day one and holds it for three years is paying a revolving rate on a static balance, which is exactly what a term loan prices more cheaply.
3. The test: project or pattern?
One question resolves most cases. Is the need a project or a pattern?
A project has a known cost, a start and an end. A new oven, a vehicle, a fit-out, an acquisition, consolidating existing debt. You know the number. Borrow the number, on a fixed schedule, and know precisely when it is finished. That is a term loan.
A pattern recurs and varies. Stock that builds before a season and clears after it, payroll in the two slow months of the year, the gap between paying suppliers and being paid by customers. You do not know the exact amount or the exact week, only that it will happen again. That is a line of credit, and the flexibility is the product.
- Can you name the total figure today?If yes, that points to a term loan. If the honest answer is "somewhere between $10,000 and $40,000, depending", it points to a line.
- Will the need recur?A one-off suits a fixed schedule. Something that returns every year suits a facility you can leave open.
- Will the money be spent at once?Immediate full deployment favours a term loan. Staged or uncertain spending favours drawing as you go.
- How long until it is repaid?Multi-year repayment is term loan territory. Weeks to months, repeatedly, is a line.
4. Qualifying for each
Lines of credit are generally easier to open than bank term loans are to obtain. Many providers want around six to twelve months of trading and consistent deposits, against the two years or more that bank and SBA term products typically expect.
That accessibility gap is worth understanding rather than simply exploiting. A line of credit approved on six months of deposits is priced for the uncertainty that comes with six months of deposits, which is why the range runs up to 25% rather than stopping where bank term lending stops. You are not getting the same money more easily; you are getting different money.
Both products weigh the same four factors — time in business, revenue, credit profile and industry — covered in more depth in our guide to how funding works.
5. Three expensive mismatches
Using a term loan for working capital. The classic error. Working capital needs are patterns, almost by definition — they recur and they fluctuate. Funding them with a lump sum means paying multi-year interest on a balance that was only needed for a few weeks at a time, and then facing the same gap again next year with the previous loan still being repaid.
The tell is simple: if you have taken a term loan for working capital and find yourself needing another one before the first is repaid, the product was wrong rather than the amount. Two overlapping term loans covering a recurring gap is a considerably worse position than one revolving facility that empties and refills.
Using a line of credit as long-term finance. Drawing a facility to its limit and leaving it there converts a flexible instrument into an expensive fixed one. If the balance has not moved in a year, it is not a line of credit in practice; it is a term loan at a line of credit's rate. Refinancing it into an actual term loan is usually the cheaper move.
Opening a line "just in case" and forgetting the fees. Maintenance fees accrue whether you draw or not. An unused facility is not free, and several unused facilities are a meaningful annual cost for no benefit.
6. Common questions
Can I have both?
Yes, and many established businesses do — a term loan against a specific asset, and a line of credit for working capital. Providers will look at total obligations when assessing either, so existing commitments affect what you are offered.
Does an unused line of credit affect my credit?
Opening one usually involves an inquiry, and the facility may appear on business credit reports. An unused limit is generally viewed less severely than a drawn balance, but it is not invisible to the next underwriter.
Which is faster?
A line of credit, in practice. Opening one commonly takes one to seven days; drawing on an open one is close to instant. Bank term loans typically run two to four weeks, and SBA term products considerably longer.
What about a business credit card?
A card is a small revolving facility with a different fee structure, usually under $50,000, often with a 0% introductory period before reverting to roughly 18–29% APR. For small, short-lived expenses it can undercut both products — provided the balance is cleared before the intro period ends.
Figures on this page describe each funding type generally, based on published market ranges. They are not offers, and they are not specific to any one company. Your own rate, amount and terms depend entirely on the provider’s underwriting and your qualifications. Nothing here is financial advice.